Monday, November 24, 2008

Yuan Watch : IMF Forecast and advice

In its latest regional economic outlook, the IMF trimmed its 2008 gross domestic product forecast for Asia to 6.0% from an earlier estimate of 6.1% given just a month ago, while slashing its 2008 forecast to 4.9% from 5.6%. "Despite Asia's strong fundamentals, notably a substantial cushion in external reserves and robust corporate and banking sectors, the region is being buffeted by large external shocks," Jerald Schiff, senior advisor of the fund's Asia and Pacific department, in a conference call. The IMF, which views monetary policy as the first defense, said most Asian central banks should consider further easing. Many countries also have room for fiscal stimulus, the report said, noting that China and some others have already announced spending plans. The IMF's forecast for China for 9.7% growth this year and 8.5% in 2009, released earlier in the month, already incorporates the country's planned 4 trillion yuan stimulus package. Noting that there is already talk of additional measures, Nigel Chalk, the IMF's mission chief for China, said on the call that the government has room for more stimulus and should consider it. (They increased the 'plan' to 10 trillion shortly thereafter. - AM) Turning to currency policy, the IMF said that while a case could be made for some intervention to smooth excess volatility, "sustained one-sided intervention may backfire, resulting in larger and more disruptive adjustments later." The IMF recommends letting exchange rates adjust, and said China should allow greater flexibility to rebalance growth toward domestic consumption. (A ' flexible' rate would allow them to spend 2 trillion on domestic consumption without borrowing or printing. - AM)